Category: Trending Tax Topics

Exemptions have been repealed for yourself, your spouse and any/all dependents

Child Tax Credit has been increased to $2,000 in 2018 (previously $1,000 in 2017)

Up to $1,400 of this is a refundable credit. Which means you could receive a refund of up to $1,400 per child even if you would otherwise owed $0 in taxes. In 2017 the refundable portion was $1,000 and was claimed as an Additional Child Tax Credit.

The refundable portion is only available when the taxpayer is unable to fully use the $2,000 credit to offset their tax.

There is a credit of $500 for each dependent who does not qualify for the Child Tax Credit. This credit is not refundable and does not increase with inflation.

These credits are phased out starting at $200,000 ($400,000 for married filing joint) of adjusted gross income.

A valid SSN is required for the Child Tax Credit.

The Child Tax Credit rules start with the 2018 tax year and are scheduled to expire after December 31, 2025.

Those taxpayers that requested the six-month filing extension to double check their tax returns and file on or before the mid-October deadline are no doubt sweating bullets right now. There is only 2 full business days remaining to get your tax return submitted.

More than 14 million taxpayers filed for an extension in 2018 and, although Oct. 15 is the last day for most people to file, some may have more time. They include:

Members of the military and others serving in combat zone localities still have more time. They typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.

Taxpayers in several disaster area localities who already had valid extensions now have more time to file. Currently, taxpayers in parts of California, North Carolina, South Carolina and Texas qualify for this relief. For details, see the disaster relief page on IRS.gov. However, like other extension filers, these taxpayers were required to pay what they owed by April 18, which was this year’s filing deadline for 2017 tax returns.

The Internal Revenue Service announced that Hurricane Florence victims in parts of North Carolina and elsewhere will have until Jan. 31, 2019, to file certain individual and business tax returns and make certain tax payments.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. At the moment this pertains only to parts of North Carolina. Taxpayers in localities added later to the disaster area, including those in effected states, will automatically receive the same filing as well as payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

Asffected individuals and businesses will have until Jan. 31, 2019, to file returns and pay any taxes that were originally due during this period that occur starting on Sept. 7, 2018 in North Carolina.

This also includes quarterly estimated income tax payments due on Sept. 17, 2018, and the quarterly payroll and excise tax returns normally due on Oct. 31, 2018. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2017 extensions run out on Sept. 17, 2018. Taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 will also have more time to file.

In addition, penalties will be abated for payroll and excise tax deposits due on or after Sept. 7, 2018, and before Sept. 24, 2018, as long as the deposits are made by Sept. 24, 2018.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2018 return normally filed next year), or the return for the prior year (2017). See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

In the United States people with higher taxable incomes pay higher federal income tax rates. That being said, let’s point out some information that helps clarify some items that easily confuse people.

The government decides how much tax you owe by dividing your taxable income into brackets. Those brackets are each taxed at a corresponding tax rate. No matter which bracket you’re in, you won’t pay that tax rate on your entire income.

Example A: For a single filer with $32,000 in taxable income. That puts you in the 12% tax bracket in 2018. However you don’t pay 12% on all $32,000. You pay only 10% on the first $9,525; you pay 12% on the rest.

Example B: If you had $50,000 of taxable income, you’d pay 10% on that first $9,525 and 12% on the income between $9,526 and $38,700. And then you’d pay 22% on the rest, because some of your $50,000 of taxable income falls into the 22% tax bracket. The total bill would be about $6,900 — about 14% of your taxable income, even though you’re in the 22% bracket.

This is ONLY for federal income taxes; your state might have different brackets, a flat income tax or even no income tax at all.

How can you get into a lower tax bracket and pay a lower federal income tax rate? Discover ways of reducing your tax bill wtih credits and deductions.

Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

Certain U.S. citizens or resident aliens now qualify for the foreign earned income exclusion. This relates specifically to contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones.

The tax home requirement for eligible taxpayers, enabling them to claim the foreign earned income exclusion even if their “abode” is in the United States has changed. This is due to the recently enacted, The Bipartisan Budget Act of 2018. The new law applies for tax year 2018 and subsequent years.

Eligible taxpayers will be able to claim the foreign earned income exclusion on their income tax return for 2018 when they file. Under the exclusion, taxpayers can choose to exclude their foreign earned income from gross income, up to $103,900 (for 2018 specifically).

The foreign earned income exclusion is not automatic. Eligible taxpayers must file a U.S. income tax return each year with either a Form 2555 or Form 2555-EZ attached. These forms, instructions and Publication 54,Tax Guide for U.S. Citizens and Resident Aliens Abroad, will be revised later this year to reflect this clarification.

Foreign earned income is the income a taxpayer receives for performing personal services in a foreign country or countries during a period in which he or she meets both of the following requirements:

His or her tax home is in a foreign country, and
He or she meets either the bona fide residence test or the physical presence test.
Full details on these tests can be found in Publication 54.

Under prior law, many otherwise eligible taxpayers who lived and worked in designated combat zones failed to qualify because they had an abode in the United States. The new law makes it clear that contractors or employees of contractors providing support to U.S. Armed Forces in designated combat zones are eligible to claim the foreign earned income exclusion.

Taxpayers choosing the foreign earned income exclusion cannot take advantage of any other exclusion, deduction or credit related to the excluded income. This includes any expenses, losses or other items that would have been deductible had the exclusion not been claimed.

This is not to be confused with combat pay exclusion, which is a qualification reserved for service members in combat zones. See Publication 3 for details.

Hurricane Florence victims in parts of North Carolina and elsewhere have until Jan. 31, 2019, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, this only includes parts of North Carolina, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

Also included in this deadline forgiveness is quarterly estimated income tax payments due on Sept. 17, 2018, and the quarterly payroll and excise tax returns normally due on Oct. 31, 2018. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2017 extensions run out on Sept. 17, 2018. Taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 will also have more time to file.

In addition, penalties on payroll and excise tax deposits due on or after Sept. 7, 2018, and before Sept. 24, 2018, will be removed as long as the deposits are made by Sept. 24, 2018.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Taxpayers need not contact the IRS to make this relief reqeust. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty removed.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2018. In addition, ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year. These affected taxpayers who expect to file a tax return in 2019 must submit a renewal application as soon as possible.

Who should renew an ITIN

If your ITIN is expiring and you need to file a tax return in 2019, you must submit a renewal application. Others do not need to take any action.

ITINs with the middle digits 73, 74, 75, 76, 77, 81 or 82 (For example: 9NN-73-NNNN) need to be renewed even if you have used it in the last three years. The IRS will begin sending the CP-48 Notice, You must renew your Individual Taxpayer Identification Number (ITIN) to file your U.S. tax return, in early summer to affected taxpayers. The notice explains the steps to take to renew the ITIN if you will be using it to file a U.S. tax return in 2019. If you receive the notice after taking action to renew yourr ITIN, do not take further action unless another family member is affected.

If you have an ITIN with middle digits of 70, 71, 72, 78, 79 or 80 and it has previously expired, you can still renew at any time.

Due to the deduction for personal exemptions being suspended for tax years 2018 through 2025 by the Tax Cuts and Jobs Act, spouses or dependents residing outside the United States do not need to renew their ITINs unless they anticipate being claimed for a tax benefit (for example, after they move to the United States) or if they file their own tax return. Consequently, spouses or dependents outside the United States who would have been claimed for this personal exemption benefit and no other benefit do not need to renew their ITINs this year.

Family options available

Taxpayers with an ITIN that has middle digits 73, 74, 75, 76, 77, 81 or 82, as well as all previously expired ITINs, and have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return.

Renewing an ITIN

To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. If you are submitting a Form W-7 to renew your ITIN, you are not required to attach a federal tax return. However, you must still note a reason for needing an ITIN on the Form W-7.

There are three ways to submit the W-7 application package:

Mail the Form W-7, along with original identification documents or copies certified by the agency that issued them, to the IRS address listed on the Form W-7 instructions. The IRS will review the identification documents and return them within 60 days.

Work with Certifying Acceptance Agents (CAAs) authorized by the IRS. CAAs can authenticate all identification documents for primary and secondary taxpayers, verify that an ITIN application is correct before submitting it to the IRS for processing and authenticate the passports and birth certificates for dependents.

In advance, call and make an appointment at a designated IRS Taxpayer Assistance Center to have each applicant’s identity authenticated in person instead of mailing original identification documents to the IRS. Applicants should bring a completed Form W-7 along with all required identification documents. See the TAC ITIN authentication page for more details.

Common mistakes and delays to avoid next year

Federal tax returns that are submitted in 2019 with an expired ITIN will be processed. However, certain tax credits and any exemptions will be disallowed. Taxpayers will receive a notice in the mail advising them of the change to their tax return and their need to renew their ITIN. Once the ITIN is renewed, applicable credits, exemptions, and refunds will be issued.

Several common mistakes can slow down and hold some ITIN renewal applications. They generally center on missing information or insufficient supporting documentation, such as name changes. It is best to check over your form carefully before sending it to the IRS.

The IRS no longer accepts passports that do not have a date of entry into the U.S. as the sole identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. The dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:

U.S. medical records for dependents under age 6,

U.S. school records for dependents under age 18, and

U.S. school records (if a student), rental statements, bank statements or utility bills listing the applicant’s name and U.S. address, if over age 18.

As we get closer to the end of 2018 there are new rules taxpayers should be aware of when it comes to tax reform. For 2018, the standard deduction amount has been increased for all filers and there are new rules regarding what you can/cannot itemize.

Standard deduction amount increased. For 2018, the standard deduction amount has been increased for all filers, and the amounts are as follows.

Single or Married Filing Separately—$12,000.

Married Filing Jointly or Qualifying Widow(er)—$24,000.

Head of Household—$18,000.

Because of this change, many taxpayers are considering filing a new Form W-4 with their employer.

Changes to itemized deductions. For 2018, the following changes have been made to itemized deductions that can be claimed on Schedule A.

If your adjusted gross income is over a certain amount you no longer need to worry about your itemized deductions being limited.

You can deduct the part of your medical and dental expenses that is more than 7.5 percent of your adjusted gross income.

Your deduction of state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately).

Say goodbye to job-related expenses or other miscellaneous itemized deductions that were subject to the 2 percent of AGI floor. You may still deduct certain other items on Schedule A, such as gambling losses.

For indebtedness incurred after December 15, 2017, the deduction for home mortgage interest is limited to interest on up to $750,000 of home acquisition indebtedness. This new limit doesn’t apply if you had a binding contract to close on a home after December 15, 2017, and closed on or before April 1, 2018, and the prior limit would apply.

Think again if you will be banking on using your interest on home equity loan. That will no longer be deductible, which means indebtedness not incurred for the purpose of buying, building, or substantially improving the qualified residence secured by the indebtedness.

The limit on charitable contributions of cash has increased from 50 percent to 60 percent of your adjusted gross income.

The Internal Revenue Service released a statement urging taxpayers with children and other dependents to use the Withholding Calculator on the IRS.gov website to do a “paycheck checkup.” This is due to the changes created in the 2017 Tax Cuts and Jobs Act that can affect 2018 returns that taxpayers will file in 2019.

Curious how these changes could affect your 2018 tax situation? Here is a clear cut list of the major changes in relation to the Child Tax Credit:

Raises the Child Tax Credit from $1,000 to $2,000.

Offers the Additional Child Tax Credit for certain individuals who cannot receive the full amount of the Child Tax Credit. The Additional Child Tax Credit is up to $1,400 of the Child Tax Credit and is refundable for each qualifying child. A refundable credit may give taxpayers a refund even if they don’t owe any tax.

Changes phase-outs for the Child Tax Credit and the Additional Child Tax Credit. These credits now begin to phase out at $400,000 for couples and $200,000 for singles, compared with 2017 amounts of $110,000 for couples and $75,000 for singles.

Adds a new credit. Dependents who can’t be claimed for the Child Tax Credit may still qualify taxpayers for the Credit for Other Dependents. This is a credit of up to $500 per qualifying person. The phase-out amounts of the Child Tax Credit apply to this credit.

The Withholding Calculator is an accurate, simple way for most taxpayers to determine their correct withholding amount. The tool allows taxpayers to enter their expected 2018 income, deductions, adjustments and credits – including the Child Tax Credit.

The Withholding Calculator will recommend how to complete new Forms W-4 with all employers. If a taxpayer is at risk of being under-withheld, the calculator will recommend an additional amount of tax withholding for each job. The taxpayer can enter these amounts on their respective Forms W-4.

Employees who complete a new Form W-4 should submit it to their employers as soon as possible.